According to
GAO’s most recent report about the issue, most of the 22 plan representatives
GAO interviewed said their hedge fund investments met expectations overall,
despite, in some cases, significant losses during the financial crisis. A few
plan representatives, however, expected hedge fund investments to be much more
resilient in turbulent markets, and found the losses
disappointing.

Some plan
representatives described significant difficulties in hedge fund and private
equity investing related to limited liquidity and transparency, and the
negative impact of the actions of other investors in the fund—sometimes
referred to as co-investors. For example, representatives from one plan
reported they were unable to cash out of their hedge fund investments due to
discretionary withdrawal restrictions imposed by the fund manager, requiring
them to sell some of their stock holdings.

In 2011, GAO
issued a report contending that hedge funds and private equity investments pose
a number of risks and challenges beyond those posed by traditional investments
(see “GAO
Expresses Concerns about DB Alternative Investments“). The agency said most plans
included in its review have taken actions to address challenges related to
their hedge fund and private equity investments, including allocation
reductions, modifications of investment terms, and improvements to the fund
selection and monitoring process.

Most plans GAO
contacted have maintained or increased their allocations to alternative
investments. However, most plans have also adjusted investment strategies as a
result of recent years’ experiences. For example, three plans have reduced
their allocations to hedge funds or private equity. Other plan representatives
also took steps to improve investment terms, including more favorable fee
structures and enhanced liquidity. However, some plan representatives and
experts indicated that smaller plans would likely not be able to take some of
these steps.

The GAO
previously recommended that the DoL publish guidance for plans that invest in
alternative assets, but to date, it has not done so, in part because of a
concern that the lack of uniformity among such investments could make development
of useful guidance difficult.

In 2011, the DoL
advisory body specifically revisited the issue of pension plans’ investments in
hedge funds and private equity, and a report is expected in early
2012.